There seems to be some clouded confusion as to whether keeping all your borrowing with different banks versus having all your loans with the one bank. So I am going to try and clear the air.
I often speak with investors who have their home mortgage with a different lender to their investments and when I ask why they have done this, it’s the answers that I find the most disturbing.
The three common answers I get are:
To answer the first objective; I personally don’t believe our major banks will go under. In fact the Commonwealth Bank announced on the 15th August last week their 2011-12 net annual profit ( after tax ) of over $7 billion. Yes 7 bill… this was up 11 percent from the previous financial year.
http://www.commbank.com.au/about-us/shareholders/financial-information/results/
That makes it a valid reason for staying with a larger lender verse smaller niche lenders, unless your personal circumstances call for niche lender policies. Niche lenders will approve loans for borrowers who have unusual circumstances or very basic lending requirements…
But what happens when a lender pulls out of the market?
During the GFC there were several niche or non bank lenders who pulled out of the market as their business model was no longer profitable as they were no longer able to seek wholesale funding (buy cheap money), meaning no new business.
What this meant for “some” of the borrowers who held loans with these lenders, was the fact that the loan books, or accounts were sold off to other lenders, institutions and/or businesses. So in many cases, as interest rates reduced during 2009 and 2010, these customers didn’t receive the rate cuts and many customers were forced to refinance to the bigger banks and/or didn’t receive the same level of service as the loans were sold to a company who purchased this to make a profit and/or recoup costs, rather than run it as a business and generate new customers.
Please keep in mind, not all non banks/niche lenders had this issue. It was very much the lenders who offered the high risk products that had the vast majority of issues, but in some cases, it was the vanilla or “mum and dads” that felt the brunt of the high interest charges..and yes the interest rates were higher, but these customers were not forced to sell their home, unless they failed to repay the debt… Please note, we use all lenders including non banks, its just a matter of who suits what lender….
Remember, you have the lenders money… not the other way round.
To answer the second objective; Why clients don’t want their loans with one lender because they think banking one bank automatically means the loans are all cross-securitised has got me thinking. Either many mortgage brokers and bankers do not understand cross securitisation or they don’t explain it to their clients so they clearly understand.
Having your loans with one lender does not automatically mean they are cross securitised. So let me explain in Todd language;
When loans are “cross securitised” this means the lender has a registered mortgage over 2 or more properties. If worse case occurs you had two properties, with two loans, and the second loan was over two properties, in which you failed to repay the debt on the second property, the bank would sell that property and any shortfall of funds, they can take seek those funds by taking the other property, selling and recouping their cost.. leaving you with the difference.
However, again, if you make the loan repayments, you wont have an issue, or worst case, you sell the second property, and you repay the debt on any shortfall. You borrowed the money in the first place, it the interest needs to be paid no matter who your lender is…
Remember, banks are not in the industry of selling houses, they sell money. And where possible they will negotiate with yourself to keep you in your home.
But you can easily have your loans with one lender and have them structured as “Stand Alone”. This simply requires a split loan held against the property with equity and a second loan held against the second property.
As an example, you have a home and want to buy an invest property;
Property 1 value – $600,000
Mortgage Home – $310,000
Split Investment – $70,000 (tax deductible)
Total loan – $380,000
Loan to value ratio – 63%
Property 2 value – $300,000
Mortgage invest – $240,000
Loan to value ratio – 80%
Now the $70,000 is tax deductible even though the security that it is held against is your home. Remember it is the purpose of the funds not the security. And that purpose of the funds was to purchase an investment property, which qualifies as an investment debt i.e. tax deductible debt
If you were in the same position as mentioned earlier where you could not afford the investment property and the bank were to repossess it, if there were a shortfall in the sale, same lender or not, they have no recourse on your home.
Prior to getting to that stage you would try and sell the investment property, even if it were for the $240,000.
When this occurs, the $70,000 can still be tax deductible under circumstances, but you need to chat with your accountant about this.
Now, the benefits of having your loans with one lender are:
Now in the past I have myself used different lenders. If my lending capacity with one lender has maxed out for whatever reason and they will no longer lend me any further funds to invest with, and I know I can easily afford to continue to invest, I will look to use any lender who will give me the money.
As an example, the maximum borrowing can differ anywhere up to $100,000 between lenders, as they have a different criteria, benchmarks and lending policies.
All lenders change their policies and servicing abilities and where one lender may have been lenient in lending one year, may tighten their lending ability the next so if you had an income of $80,000 and wanted to know your maximum borrowing with each of the major banks, there would be a considerable different in that loan size they would all offer. This is where a broker comes in handy. We can check this easily for you across a raft of lenders.
So, if you are told or have been told, you need to spread your borrowing between lenders, you need to ask whomever is providing this advice;
Its important to be aware of your options, and I always like to keep things simple, explain the facts, and worst case, if my customers aren’t happy with my advice, they wont deal with me anyway?
If you borrow from the banks, you have an obligation to repay the debt, as long as you abide by the rules, everyone’s happy.
I hope that clears the air a little more…